(Newswire.net — January 27, 2020) —
The word inflation is really an umbrella term. It represents a wide variety of aspects. Whether it is consumer spending, business investment, government programs or employment rates, all of these things play a crucial role in our economy. Understanding inflation can help you make more educated decisions with your investments.
This can be especially critical in real estate. Here is a breakdown of the role that inflation plays in the real estate market.
Understanding inflation
Briefly summarized, inflation is the sustained rise in overall price levels of an economy. Inflation that is considered moderate is directly correlated with strong economic growth. But high inflation can have the opposite effect and actually stifle growth in an economy. Economic growth needs to rise at a steady and consistent level to be the most effective.
Ways that inflation affects real estate
Building materials
The price of building a home can differ quite a bit based on the current price of materials and these prices can fluctuate dramatically due to inflation. Building materials such as wood, copper, concrete, steel and glass are all susceptible to rising costs, which in turn can cause a house to cost more than first anticipated.
Borrowing money gets expensive
Another result of inflation on the real estate market is what happens to interest rates. Rising inflation can cause federal banks to hike up their interest rates, which makes it more expensive when a person wants to borrow money to buy a home.
More rentals occur
As a result of inflation bumping up interest rates, less people can afford to buy a home, so they start renting. This can impact the sales of single-family residential homes, which is ideal for landlords who may end up building more multi-unit buildings. However, this can take a toll on the real estate market as a whole. Also, unlike mortgages, the price of rent can be increased, which a landlord may do if his or her costs have been increased. Again, this affects people who may be renting so they can save up to buy a home.
Protection from inflation
As stated above, since mortgage rates are generally locked in, inflation doesn’t affect you if you already own a home. So even though inflation may devalue the dollar, you are still able to pay off your home with “less valuable” dollars. Homes also generally appreciate closely in sync with rising inflation. So, owning a home can actually protect you from the rising prices associated to inflation.
Foreclosures and lack of loans
Unfortunately, some of the largest effects of inflation on the real estate market come in the form of homes being sold as power of sales and the lack of loans being given out to people to buy homes. Inflation can cause people to have to spend more on food, gas, bills and other life essentials. This can cause them to miss house payments and lose their homes.
Also, because of the fear lenders may have about approving loans during times of high inflation, people may be less likely to get the money they need to buy a home in the first place.
These are just some of the main ways that inflation affects the real estate market. If you have additional questions or are looking for advice, feel free to reach out to us for more information.